Reading the MPC

When Mervyn King counted up the votes at this month's meeting of the Bank of England's monetary policy committee, the result sounded a bit like the bizarre line-up for a football team that had a player sent off - 2:6:1.

The two at the back were Andrew Sentence and Tim Besley, the MPC's uber-hawks. They opposed any cut in the bank rate this month on the grounds that rising oil prices and the weaker pound pose a real and present danger to the government's 2% inflation target. The MPC's two hardmen argued that cutting rates at this juncture might give the impression the Bank had gone soft.

Packing the midfield were King himself; his two deputy governors, Sir John Gieve and Rachel Lomax; the Bank's chief economist, Charlie Bean; its head of financial markets, Paul Tucker; and Kate Barker. Up front on his own was David Blanchflower, the MPC's uber-dove, who wanted a half-point cut.

What does this three-way split tell us? Firstly, that the Bank is struggling to make sense of what's happening to the economy and is unsure whether the current strange mixture of a severe credit crisis and a rising cost of living will lead to early 1980s recession or late 1980s inflation - or indeed both.

Secondly, the lack of unanimity suggests the MPC will move forward in hesitant baby steps. Blanchflower is unlikely to find too many takers for his half-point cuts, even though his argument that Britain is America with a lag of between six and nine months is compelling. There is now less of a chance of a back-to-back cut next month, unless there is some particularly gruesome economic data over the next couple of weeks.

Finally, since the argument will finally have to be resolved one way or another, it looks more probable that Blanchflower's analysis will prove correct. There was little upward pressure on pay when the economy was booming, so it would indeed be curious if wage deals started to shoot up at a time when it is obvious that the economy is slowing down.

Higher food and fuel prices will prove deflationary unless pay bargainers can achieve awards that compensate workers for higher prices, and there seems little prospect of them doing that. Over the next year the sequence of events is likely to be growing recessionary pressure leading to weaker inflationary pressure, prompting chunky falls in interest rates.